Rates

US Rates Rise From The Front Out As Fed Announces Start Of Taper Later This Month, With Strong ADP And ISM Numbers Helping

We were wrong in our expectation of seeing higher rates volatility this week: the 1-month by 2Y USD ATM swaption implied volatility has fallen continuously since Monday, and the Fed was extra careful not to shock the market in any way today

Published ET

Eurodollar Future (EDU2) Implied Hike (bp) & 1M By 2Y USD ATM Swaption Implied Vol | Source: Refinitiv

Eurodollar Future (EDU2) Implied Hike (bp) & 1M By 2Y USD ATM Swaption Implied Vol | Source: Refinitiv

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QUICK US SUMMARY

  • 3-Month USD LIBOR -0.52bp today, now at 0.1398%; 3-Month OIS +0.1bp at 0.0780%
  • The treasury yield curve steepened, with the 1s10s spread widening 1.6 bp, now at 147.9 bp (YTD change: +67.5bp)
  • 1Y: 0.1240% (up 4.1 bp)
  • 2Y: 0.4757% (up 2.8 bp)
  • 5Y: 1.1897% (up 4.7 bp)
  • 7Y: 1.4599% (up 4.6 bp)
  • 10Y: 1.6034% (up 5.6 bp)
  • 30Y: 2.0245% (up 6.6 bp)
  • US treasury curve spreads: 2s5s at 71.3bp (up 1.8bp today), 5s10s at 41.4bp (up 0.9bp today), 10s30s at 42.1bp (up 1.0bp today)
  • Treasuries butterfly spreads: 1s5s10s at -62.3bp (up 0.3bp today), 5s10s30s at -0.4bp (down -0.9bp)
  • US 5-Year TIPS Real Yield: +0.9 bp at -1.7050%; 10-Year TIPS Real Yield: +1.8 bp at -0.9550%; 30-Year TIPS Real Yield: +2.1 bp at -0.2990%

FOMC WRAP-UP

  • Taper to start later this month at the expected pace of $10bn in Treasuries + $5bn in MBS
  • The Fed was careful not to surprise the market, but they also opened the door to a faster pace of tapering if necessary: "similar reductions in the pace of net asset purchases will likely be appropriate each month, but it is prepared to adjust the pace of purchases if warranted by changes in the economic outlook"
  • Powell acknowledged inflationary pressures, saying that "the risk is skewed towards higher inflation short-term and we need to be in a position to act"
  • We read that as an indication that the Fed knows that inflation could overshoot in the short term, and the hurdle will be high to surprise the FOMC into accelerating the taper.
  • That was also how Eurodollar futures read the statement, with only a mild increase in the pricing of an expedited taper
  • Having said that, the expected Fed hike now priced into March 2022 Eurodollar futures (EDH2) is 11bp, equivalent to a 44% probability of seeing a rate hike before June 2022.
  • The June 2022 contract (EDM2) already prices in more than 1 full hike (28bp expected), which means market expectations are split between April/May or July/August 2022 for the timing of the Fed's rate liftoff, and currently leaning later rather than earlier

US MACRO RELEASES

  • Mortgage applications, market composite index, refinancing for W 29 Oct (MBA, USA) at 2645.00 (vs 2763.80 prior)
  • Mortgage Lending Rates, FRM 30-Year Contract Rate (MBA Sourced) for W 29 Oct (MBA, USA) at 3.24 % (vs 3.30 % prior)
  • Mortgage applications, market composite index, purchase for W 29 Oct (MBA, USA) at 271.10 (vs 275.60 prior)
  • MBA Mortgage Applications Survey composite index, weekly percentage change, Change P/P for W 29 Oct (MBA, USA) at -3.30 % (vs 0.30 % prior)
  • Mortgage applications, market composite index for W 29 Oct (MBA, USA) at 623.80 (vs 645.10 prior)
  • ADP total nonfarm private employment (estimate), Absolute change for Oct 2021 (ADP - Automatic Data) at 571.00 k (vs 568.00 k prior), above consensus estimate of 400.00 k
  • PMI, Services Sector, Business Activity, Final for Oct 2021 (Markit Economics) at 58.70 (vs 58.20 prior)
  • PMI, Composite, Output, Final for Oct 2021 (Markit Economics) at 57.60 (vs 57.30 prior)
  • ISM Non-manufacturing, Business activity for Oct 2021 (ISM, United States) at 69.80 (vs 62.30 prior)
  • ISM Non-manufacturing, NMI/PMI for Oct 2021 (ISM, United States) at 66.70 (vs 61.90 prior), above consensus estimate of 62.00
  • ISM Non-manufacturing, Employment for Oct 2021 (ISM, United States) at 51.60 (vs 53.00 prior)
  • ISM Non-manufacturing, Prices for Oct 2021 (ISM, United States) at 82.90 (vs 77.50 prior)
  • ISM Non-manufacturing, New orders for Oct 2021 (ISM, United States) at 69.70 (vs 63.50 prior)
  • Manufacturers New Orders, Total manufacturing excluding transportation, Change P/P for Sep 2021 (U.S. Census Bureau) at 0.70 % (vs 0.50 % prior)
  • Manufacturers New Orders, Durable goods total, Change P/P for Sep 2021 (U.S. Census Bureau) at -0.30 % (vs -0.40 % prior)
  • Manufacturers New Orders, Durable goods excluding defense, Change P/P for Sep 2021 (U.S. Census Bureau) at -1.90 % (vs -2.00 % prior)
  • Manufacturers New Orders, Total manufacturing, Change P/P for Sep 2021 (U.S. Census Bureau) at 0.20 % (vs 1.20 % prior), above consensus estimate of 0.00 %
  • Manufacturers New Orders, Nondefense capital goods excluding aircraft, Change P/P for Sep 2021 (U.S. Census Bureau) at 0.80 % (vs 0.80 % prior)
  • Manufacturers New Orders, Durable goods excluding transportation, Change P/P for Sep 2021 (U.S. Census Bureau) at 0.50 % (vs 0.40 % prior)
  • Policy Rates, Fed Interest On Excess Reserves for 04 Nov (FED, U.S.) at 0.15 % (vs 0.15 % prior)
  • Policy Rates, Fed Funds Target Rate for 04 Nov (FOMC, U.S.) at 0.125 % (vs 0.125 % prior), in line with consensus estimate
US 5Y & 10Y Treasury Yields Intraday | Sources: ϕpost, Refinitiv dataUS Treasury Curve Spreads Intraday | Sources: ϕpost, Refinitiv data

US FORWARD RATES

  • 3-month Eurodollar future (EDU2) expected hike of 47.5 bp by the end of 2022 (equivalent to 1.9 hikes by end of 2022), up 4.0 bp today
  • The 3-month USD OIS forward curve prices in 132.3 bp over the next 3 years (equivalent to 5.29 rate hikes)
  • The 3-month Eurodollar zero curve prices in 152.3 bp over the next 3 years (equivalent to 6.09 rate hikes)
  • 1-year US Treasury rate 5 years forward up 4.8 bp, now at 2.0854%, meaning that the 1-year Treasury rate is now expected to increase by 191.1 bp over the next 5 years (equivalent to 7.6 rate hikes)
Fed Hikes Priced Into Eurodollar Futures | Sources: ϕpost, Refinitiv data Fed Hikes Priced Into The USD OIS Forward Curve | Sources: ϕpost, Refinitiv data

US INFLATION & REAL RATES

  • TIPS 1Y breakeven inflation at 3.94% (up 0.1bp); 2Y at 3.33% (down -0.5bp); 5Y at 2.96% (up 2.7bp); 10Y at 2.54% (up 3.8bp); 30Y at 2.34% (up 4.7bp)
  • 6-month spot US CPI swap down -3.1 bp to 3.591%, with a flattening of the forward curve
  • US Real Rates: 5Y at -1.7050%, +0.9 bp today; 10Y at -0.9550%, +1.8 bp today; 30Y at -0.2990%, +2.1 bp today
US TIPS Inflation Breakeven Curve | Sources: ϕpost, Refinitiv dataUS TIPS Real Yields | Sources: ϕpost, Refinitiv data

RATES VOLATILITY & LIQUIDITY

  • USD swap rate implied volatility (USD 1 Month by 1 Year ATM Swaption) down -1.6% at 44.4%
  • 3-Month LIBOR-OIS spread down -0.6 bp at 6.2 bp (12-months range: 2.6-17.4 bp)
US Rates Volatility | Sources: ϕpost, Refinitiv data3-Month USD LIBOR-OIS Spread | Sources: ϕpost, Refinitiv data

KEY INTERNATIONAL RATES

  • Germany 5Y: -0.482% (down -0.1 bp); the German 1Y-10Y curve is 0.6 bp flatter at 53.1bp (YTD change: +37.5 bp)
  • Japan 5Y: -0.086% (down -0.3 bp); the Japanese 1Y-10Y curve is 1.4 bp flatter at 17.5bp (YTD change: +4.2 bp)
  • China 5Y: 2.783% (down -0.4 bp); the Chinese 1Y-10Y curve is 0.2 bp steeper at 71.4bp (YTD change: +25.0 bp)
  • Switzerland 5Y: -0.361% (up 1.2 bp); the Swiss 1Y-10Y curve is 7.6 bp flatter at 61.4bp (YTD change: +36.0 bp)
Changes In Global Inflation Expectations | Sources: ϕpost, Refinitiv dataChanges In Global Rate Hikes Expectations | Sources: ϕpost, Refinitiv data